Using a variety of variables, the MultiState tax team has developed a ranking of states most likely to increase business taxes in 2021. The factors include partisan makeup, gubernatorial position on tax increases, legislative history, strength of rainy day funds, and revenue outlook.
Five states stand out as “highest risk” — California, Colorado, Connecticut, New York, and Oregon.
Eleven states stand out as “significant risk” — Delaware, Hawaii, Illinois, Iowa, Michigan, New Jersey, New Mexico, Pennsylvania, Rhode Island, Virginia, and Washington.
Although most of the focus of the 2020 elections has been on the federal level, our readers know the importance of state elections for businesses. There was a general expectation that regardless of what happened with the presidency, Democrats were likely to pick up a significant number of state legislative seats and to gain control of select legislative chambers. However, those predictions didn’t come to fruition. Based on current counts, not only will Democrats have “flipped” zero state chambers, they have lost in both chambers of the New Hampshire legislature and their leverage in the Alaska House (which has been governed by a coalition). It appears voters soured on higher taxes, with, for example, the defeat of Proposition 15 (split roll property tax) in California and graduated income tax rates in Illinois.
These state election results are modestly beneficial for businesses from a tax perspective, or, at least, they are nowhere near as troubling as had been predicted. That said, it looks like we’re headed for more divided government at the federal level, which could pose challenges for state business tax policy. Why? Because federal political gridlock could result in less aid to state and local governments to address budget challenges in the wake of the pandemic. This federal political uncertainty will have impacts on state tax policy.
How can we forecast which states may experiment with tax policy? A variety of overlapping political and economic factors are relevant when considering which states may pose the highest risk for increasing business taxes, so determining a systematic way to evaluate these factors is essential. This report condenses these factors into one easy-to-understand state risk score. States with highest scores are considered more likely to increase business taxes in 2021.